White Mountains Railroad v. Eastman

Sawyer, J. The verdict in this case was taken, by consent, for the plaintiffs, subject to the opinion of the court upon various exceptions to the rulings of the Court of Common Pleas on the several points in the case. The first exception is to the competency of William H. Cummings as a witness for the plaintiffs, on the ground of his interest. If he had any interest it was solely on the ground that by the laws of this State he might be made personally liable for the debts of the corporation. The case finds that he was examined on the voir dire, and that he stated he had been a stockholder in the corporation until two or three weeks before he testified, and that the corporation was indebted by bond and otherwise to the amount of $220,000, but without stating whether any portion of this indebtedness arose or existed while the witness was a stockholder. It would seem to be a very probable inference that such was the fact. It may, nevertheless, be otherwise. In Chesley v. Pierce & als., 32 N. H. 388, it was held that a stockholder is not answerable, under the private liability laws of this State, for a corporate debt contracted before he became a stockholder ; and by the express provisions of the act of 1846, chap. 322, sec. 2, Comp. Stat. 315, he is not to be made liable for such as may be contracted after a sale of his shares, if he — 135 — shall have notified the town-clerk with whom it is the duty of the corporation to file a list of its stockholders, of the time of sale and the name of the person to whom sold. Upon the answers given by the witness, as stated in the case, he may be under no liability for the debts of the corporation upon either or both of these grounds. If excluded as a witness, it must be because the facts disclosed show his interest. The facts stated are not sufficient for that purpose, and consequently he was properly admitted. If, however, he were shown to be interested by reason of his personal liability as a stockholder, that interest is not of such a nature as to exclude him from testifying for the corporation. The interest does not result from any direct liability for the debts of the corporation, nor is it fixed and made certain, or in any way increased or diminished by the result of this suit, whether favorable or unfavorable to the corporation. It is entirely contingent in its character, and it remains unaffected by the result, depending upon the same contingencies as fully after the determination of this suit, either way as before. The only possible way in which the witness can be affected by the issue is, that if it be favorable to the corporation, and they succeed in obtaining satisfaction of the judgment which they may recover, they will have a larger fund in possession out of which to pay those debts than if the result had been otherwise. This is the condition of every creditor testifying in a cause in favor of his debtor. Besides, if, upon the statement of the witness, that the stockholders were not individually liable upon the bonds, and that the directors voted that all other debts contracted by the corporation should be subject to the same condition, it is to be understood that the bonds contained a stipulation to the effect that the personal liability of the stockholders should not attach as to the bonds, and that the other debts of the corporation were contracted under a similar agreement on the part of the creditors, this would amount to an express waiver by the creditors of all claim to any remedy against the stockholders personally; and we are not prepared to say that the personal liability could be — 136 — enforced in disregard of such waiver. It is enough, however, for the decision of the particular question in this case, that, upon the facts stated, the personal liability of Cummings is not made to appear, or, if made to appear, that it is of a contingent character, and too remote and uncertain to exclude him. An objection was also taken to the admissibility of the records of the corporation, as evidence of the corporate votes and votes of the directors. The ground of the objection, as suggested in the argument, is, that the corporation cannot use their own records as evidence in their own favor to sustain this action against Eastman. In 1 Greenl. Ev. 570, sec. 493, it is said the books of a private corporation are admissible as evidence of the election of their officers, and of other corporate acts there recorded, as between members of the corporation ; for as between them the books are of the nature of public books, and all the members of a corporation are chargeable with knowledge of the entries made on their books by their agent in the course of his business, and with the true meaning of those entries, as understood by him; but the books cannot in general be adduced by the corporation in support of its own claims against a stranger. In An. and Am. on Corp. 607, the doctrine is thus laid down: “ With respect to a mere stranger, unconnected in interest, such books are to be considered the books of a private individual, and no inspection can be compelled. Private entries in the books of a corporation which are under their own control, and to which none but the corporation have access, cannot be used to establish rights of the corporation against third parties.” By both of these authors the doctrine is laid down that the corporate records are evidence against all persons, to prove their organization, and all acts necessary to be done in order to their corporate existence. An. & Am. on Corp. 573; Greenl. Ev., sec. 474. And by both also it is said that entries made in corporation books, of matters relative to any property or right claimed by them, cannot be evidence for them, and it would seem even as against their own members, unless made so by act of the legislature. An. & Am. 573; Greenl. Ev., sec. 493. — 137 — In some cases, then, the test to be applied to the question, whether the corporate records are admissible upon these authorities, would seem to be whether the party against whom they are offered stands in such relation to the corporation that he is chargeable with knowledge of the records ; whether, as to him, the books are in the nature of public books — he being connected with them in interest, and of which he could demand and have inspection as of right, or whether he is a mere stranger, unconnected in interest; they being as to him private books, the inspection of which could not be compelled in his favor. In other cases, the test to be applied would seem to be one not having reference to the character of the party, but to the nature of the matter which is the subject of record. In this view the test is, whether the matter recorded consists of corporate acts, involving the organization or existence of the corporation, or whether it is merely matter pertaining to some contract, property, or right, not essentially involving the exercise of power under the corporate franchise. Whether any general rule upon the subject, and if so, what that rule may be, is to be deduced from an extended examination of the cases, we do not purpose to inquire. It is sufficient for this case that for the only material purpose for which the records were introduced, namely, to prove the assessments made upon the shares, we think there can be no doubt they were competent as against the intestate. He was one of the original grantees of the charter, one of the directors of the corporation, and claimed to be and exercised the rights of a stockholder from the time of his subscription, in virtue of the thirty shares here in question. The proceeding in ordering the assessments was a strictly corporate act, and one of a character such, if not to render it necessary, yet to make it in the highest degree proper that it should be entered on the corporate records. It was to operate upon all the shares and all the shareholders, and was in its nature essentially such as the acts and doings involving the organization of the corporation; material on the question of user or non-user, and necessary in order to preserve the existence of the corporation. It was — 138 — totally unlike an entry of any direct matter of contract, or one touching the title to property, not designed to have a general effect upon all the members of the corporation. We think, in relation to such matter, the corporation records are evidence against one situated in relation to the corporation as was the intestate. In Turnpike Co. v. McKean, 10 Johns. 154, the court say, “ it is the general rule, and it is a rule of evidence essential to public convenience, that corporation books are evidence of the proceedings of the corporation and that was a case between the corporation and one of its shareholders. It would certainly be attended with great inconvenience, and would result in great mischief, if, when matters of this nature had been entered upon the records of the corporation by a clerk required to act under an official oath, and there were no circumstances of suspicion connected with the records, they were to be thrown aside in every suit in which the corporation was a party, and parol testimony substituted. In Edgerly v. Emerson, 3 Foster 555, it is held that the unrecorded votes of a corporation may be proved by parol, but if entered of record, the record itself must be produced, or its absence accounted for, so as to lay the foundation for secondary evidence. The paper signed by the clerk of the corporation, purporting to authorize the defendant’s intestate, at any time within one year, to repudiate his subscription to the extent of twenty-five of the thirty shares subscribed for by him, was not competent evidence of an agreement binding on the corporation, without proof that it was executed by the authority of the directors. By section five of the charter, the president and directors are authorized, by themselves or their agents, to exercise all the powers of the corporation for the purpose of constructing and completing their railroad. The business of negotiating for subscriptions to the stock of the corporation, and thereby procuring the necessary funds for proceeding to construct and complete the road, falls within the powers thus expressly conferred upon the president — 139 — and directors. The clerk of the corporation, as such, has no power or authority in the matter. By virtue of his office he is not to be considered the agent of the directors for that purpose. To give the writing any validity, then, if there were no objections to it on other grounds, it would be necessary to prove that it was authorized by the directors, and that in executing it the clerk was acting as their agent, by their order. His testimony to the point, introduced by the defendant, and objected to by the plaintiffs, was, therefore, competent. The evidence shows an agreement in writing, made with the defendant’s intestate, by the authorized agents of the corporation in its behalf, at the same time the subscription was made by the intestate for the thirty shares, and in reference to that subscription, and therefore binding on the corporation, unless invalid on other grounds. The two cotemporaneous writings upon the same subject, between the same parties, are to be considered together as one contract, unless upon other grounds the writing given by the corporation is to be held void. Thus considered in connection, effect would be given to all the stipulations on both sides, contained in both writings, as constituting together one agreement. If no person were to be affected by the contract but the parties themselves, it would be competent for them to agree that the intestate should take and pay for thirty shares, subject, however, to the condition, that if within one year he should elect to reduce the number so subscribed for to five, or any other number not less than five, he might be at liberty so to do, and that the corporation, upon his paying for the thirty or other reduced number of shares, would give him proper certificates therefor, constituting him the owner of them. It would be immaterial whether the whole contract appeared upon one paper, or whether one paper signed by him, promising to take and pay for thirty shares, was placed in the hands of directors as containing all the evidence necessary for them to hold to enforce their claim under the contract against him; and another paper signed by the directors, or by the clerk by their order, binding them to release him from his obligation to take and pay for so many of the shares as — 140 — he had the right to repudiate, were placed iu his hands as containing all the terms of the contract necessary for him to prove, if he elected to reduce the number. In either case the agreement would be the same. But while the two writings are thus considered as parts of the same agreement, when they are of a character to affect only the parties to it, they may be regarded as separate and independent contracts whenever it is necessary so to regard them in order to protect innocent third persons, having an interest in the subject matter of the agreement, from the consequences of a fraud attempted to be practiced upon them by means of it. If necessary for that purpose, the writing by which the intestate promised to take and pay for the thirty shares, may be held as between the parties themselves to be their contract, binding in law, while the other part of the agreement, evidenced by the writing held by him, may be adjudged void, as a fraud upon third persons. Of this, neither of the parties to the fraudulent agreement would have any right to complain. If they, for the purpose of misleading and deceiving third persons, having an interest in the subject of their contract, held out the subscription of the intestate, as shown upon their subscription book, as the contract between them and him, and concealed from those third persons the fact, material for them to know, that there was a secret stipulation, making the contract an entirely different thing, the principles of common honesty would require that they should be compelled to stand to the agreement, as they held it out to be. This is to be done, not for the sake of either of the parties to the fraud, but of the innocent third persons who would be wronged by giving effect to the secret stipulation, and still more deeply wronged by holding the defendants wholly exonerated from the contract. The fraud in this case consists, not in the fact that the parties agreed that the intestate should have the right to repudiate his subscription to a certain extent, but in suppressing that material feature in the agreement, and in holding out to others as their contract one which speaks in very different terms from that which in fact they made. If the conditional character of the subscription had appeared upon the — 141 — subscription book itself, by inserting the provision that the intestate was at liberty thus to reduce his subscription, no person could have been deceived, and the contract would undoubtedly have been valid. The parties, for the purposes of deception, severed and disconnected the conditional stipulation from the contract, so as to render it on its face an absolute engagement by the intestate to pay for the thirty shares, and in this form held it out to others as their true contract. In this they acted fraudulently, and neither has reason to complain if the law holds the contract as between them to be what they held it out to be to others. This is not a case for the application of the maxim that both parties, being in pari delicto are to be left where they have placed themselves, neither being permitted to found a claim upon their fraudulent contract against the other. The contract here set up is that by which the intestate promised to pay for the thirty shares. That was not an illegal or fraudulent contract. The fraud consisted in presenting it to others as the true contract, and the whole contract on the subject, when another secret stipulation existed, which, if permitted to stand as binding, would give full effect to the fraud. It is the secret stipulation alone which operates in fraud of others, and upon that the law leaves the parties where they stand; declining to enforce it for the benefit of either; while, as to the other part of the contract, to enforce it between the parties is what is necessary to defeat their fraudulent purpose as to other innocent persons. That the proceeding is a fraud upon third persons is clear from the relation in which subscribers for stock in a corporation of this kind stand toward each other. In the subscription of each person, every other subscriber has a direct interest. Their respective subscriptions are contributions or advancements for a common object. The action of each in his subscription may be supposed to be influenced by that of the others, and every subscription to be based upon the ground that the others are what upon their face they purport to be. The fact that one man has bound himself to place a certain amount of his money upon the risk involved in the enterprise, is — 142 — an inducement to others to venture in like manner. Seeing who are his associates, and the extent of the liability which they have assumed, he regulates his own upon that consideration ; and though in form and legal effect the contract of each is with the corporation, yet among the subscribers themselves it is to be regarded as an agreement with every other subscriber to bear that proportion of the common burthen to which he professes to bind himself by the contract which he holds out to them as his contract with the corporation. To hold that the secret stipulation is valid as between these parties, would be to give full effect to the fraud, by relieving the estate of the intestate from a part of that burthen which he held out to the other subscribers he had assumed, and throwing upon them the necessity of providing for it. To hold that by the fraud the whole contract as between the parties is void, would but increase the injustice as to the other subscribers, for it would throw upon them the whole of that proportion of the common burthen which the intestate held out to them he had assumed ; while, on the other hand, by holding that the contract which the parties held out to them as the true one was in fact the contract made by them — all secret stipulations rendering it other than that being void as fraudulent towards third persons — the contemplated fraud is defeated and perfect justice done to the other subscribers, and at the same time, in so holding, no wrong is done to the parties, of which either has reason to complain. The books abound with cases in which the principle is applied that a secret agreement between the parties to a contract, changing its character from what it ostensibly is, to the prejudice of others collaterally interested, is a fraud on them, and therefore void, even as between the parties themselves. Jackson v. Duchaire, 3 T. R. 551; Wayburd v. Stanton, 4 Esp. 179. One class of cases of this character are those in which a private agreement is made between a creditor and his principal debtor in fraud of the surety. Pidcock v. Bishop, 3 Barn. & Cress. 605; Stone & als. v. Compton, 5 Bing. N. C. 142. Another class of cases to which the same principles are ap — 143 — plied are those in which an insolvent debtor secretly agrees with one of his creditors to pay a larger per cent., or to give further security, than is provided by the terms of a composition deed for the creditors generally. Leicester v. Rose, 4 East 372: Cockshot & al. v. Bennett & al., 2 T. R. 763; Jackson & al. v. Lomas, 4 T. R. 166; Wells v. Girling, 1 Brod. & Bing. 447; Knight v. Hunt, 5 Bing. 432; Lewis v. Jones, 4 Barn. & Cress. 511; Eaton v. Lincoln, 13 Mass. 424; Yeomans v. Chatterton, 9 Johns. 294. All such private agreements are held void on the ground that good faith to the other creditors requires that the equality for which it is to be understood on the face of the composition deed they bargained among themselves, shall be preserved, and the tacit understanding that all should share alike, be fairly carried out. Paige & al. v. Carter, decided in Hillsborough County, December term, 1844, though not a suit brought to enforce such private agreement, involved the consideration of the principles applicable to this class of cases. In that case, Carter had made an assignment for the benefit of his creditors, to which the plaintiffs became parties. The assignment provided for a distribution of the assets among the creditors and a discharge of the debtor from further liability. Some of the other creditors, without the knowledge of the plaintiffs, had been induced to become parties to the assignment by securities given to them by Carter beyond the assignment itself. The plaintiffs, having received their dividend under the assignment, brought their action to recover the unpaid balance of their debt, claiming that the release contained in the assignment was void by reason of the fraud ; but the court held that the additional securities, being void on the ground that if valid they would operate as a fraud upon the other creditors, the same effect and operation were thereby given to the assignment and release as though the fraudulent securities had not' been given. The principles of that case are fully applicable here. In this as in’ that, the private agreement, modifying the contract which the parties held out to all others interested in it as the true contract — 144 — between there, is a nullity, and being such, the contemplated fraud is defeated, and full effect given to the contract as though the fraudulent agreement had not been made. The testimony, therefore, of the clerk, offered by the defendant and objected to by the plaintiffs, to show the object and purpose of the parties in the execution of the private agreement relative to the reduction of the number of shares subscribed for by the intestate, was competent to show the fraudulent character of the transaction as to third persons. The fact that a large amount of debts has been allowed by the commissioner of insolvency against Eastman’s estate, for which he became liable as the surety of the plaintiffs, is immaterial to the question raised by the case. Whatever amount may be paid by the administrator on account of those debts will be a personal claim of the administrator against the plaintiffs, to be adjusted in off-set to the dividend which they will be entitled to receive of him on account of the debt allowed them in this case, and placed upon the list of claims. The evidence furnished by the records of the corporation of the several votes of the directors, extending the time for making the election to reduce the subscription, the proof of notice given by the administrator of his election, of the subscriptions by other persons subsequent to Eastman’s, and of his declarations that he considered himself liable for the thirty shares, are not so material upon any point in the case as to require further consideration. And the exception arises upon the evidence introduced by the defendant, that the corporation has never fixed and limited its capital stock, and that they have not given notice to the Governor of the assessments ordered, as required by the 3d clause of section 2 of the act of 1846, relating to corporations. Compiled Stat., chap. 147, sec. 1, ¶ 3. It is contended by the defendant that as the agreement of Eastman was in terms to take of the capital stock of the corporation the number of shares set against his name, this imports a certain proportion of a fixed and definite quantity, and that the corporation cannot proceed to — 145 — make and collect assessments until they have fixed and established the extent of that quantity, by defining and limiting their capital. The charter provides that the capital stock shall consist of not less than five hundred nor more than ten thousand shares; that upon five hundred shares being subscribed for the directors may proceed to make assessments thereon, and call in the same and commence building their road ; and that the corporation may enlarge their capital from time to time, as needed in the progress of the work, by subscriptions for new shares; that no more than one hundred dollars shall be assessed on each share, and that all shares subscribed for shall be assessed equally. It thus appears that the legislature have in the first instance fixed and limited the capital at five hundred shares of one hundred dollars each, with power in the corporation to enlarge it from time to time as the exigencies of the corporation might require. The five hundred shares having been subscribed for, the corporation were empowered at once to proceed and make and collect assessments upon them. In the provision that they may enlarge their capital from time to time by subscriptions for new shares, the legislature manifestly contemplated that the ultimate amount of the capital might remain undetermined, within the limit of the ten thousand shares, until after the assessment of the full amount authorized upon the five hundred shares. The corporation may have had no occasion to enlarge their capital. Whether they have or not is immaterial. The subscription of the intestate was made for thirty of the five hundred shares — the limit prescribed by the charter in the first instance, and subject to be enlarged at the pleasure of the corporation to the maximum limit. To hold that the corporation must have determined how far they would go in the end in the creation of stock, before they could assess upon the first five hundred shares, would defeat the object of the legislature in giving the power to assess on the first five hundred as soon as subscribed for, and to add to the capital as from time to time required ; because, in order that all the shares should be equally assessed, it would be necessary to — 146 — create the whole number of shares at once which might ever be required, and assess upon all pari passu ; or, after assessing the first five hundred at one hundred dollars each, then to assess all others to the full amount of one hundred, though by so doing an amount of funds might be raised beyond the necessities of the corporation. The amount of the capital is sufficiently defined and limited by the charter itself, to authorize the assessments upon the thirty shares subscribed for by the intestate ; and he would have no right to complain whatever additions might subsequently be made to the capital up to the designated limit, as that is the condition prescribed in the charter upon which all the subscriptions to the first five hundred shares were made. That the notice prescribed by the statute has not been given to the Governor of the assessments ordered, may leave the stockholders personally liable for the debts of the corporation, but the neglect cannot exonerate the subscribers for stock from their contracts with the corporation to take the shares and pay the assessments, as ordered. The object of the enactment in the chapter referred to is to prescribe the particular cases in which the stockholder’s shall be thus personally holden for the debts of the corporation. By sec. 1 it is provided that corporations, having for their object a dividend of profits among their stockholders, shall be governed by the provisions and subject to the liabilities in the act contained, and the stockholders and officers thereof shall be personally liable for the debts and civil liabilities of the corporation in the following cases, and not otherwise. Then follow seven distinct clauses, each specifying a particular case in which this personal liability shall attach; the third being the case of the failure of the corporation to give notice to the Governor annually of the amount of assessments voted and actually paid in, the amount of debts due to and from the corporation, and the value of their property and assets. There is nothing in the terms of the act, nor in its objects and purposes, to give to this provision the character of a condition precedent to the right of the corporation to enforce the collection of the assessments. — 147 — Nor is there any ground for the objection which has been urged in the argument, that the corporation cannot resort to an action on the contract to enforce the collection, because the charter gives them authority to sell the shares of delinquent stockholders. Where the act of incorporation gives no express remedy by suit, it is well settled that without an express agreement to pay, there is no other remedy than by a sale of the shares. But the remedy provided by the charter in authorizing the sale cannot be held to annul the contract of the parties. It has always been held to be cumulative. Glass Co. v. Alexander, 2 N. H. 380, and authorities there cited; Littleton Co. v. Parker, 14 N. H. 550. The cases, George & al. v. Harris, 4 N. H. 533, and Society v. Perry, 6 N. H. 164, are authorities decisive upon the point that the subscription containing an express promise to pay the assessments as ordered, is a contract founded upon a good consideration, capable of being enforced by suit at law upon it, like any other agreement in writing founded upon such consideration. Upon all the points presented in the case, then, the plaintiffs are entitled to recover the assessments upon the thirty shares. The verdict which was taken for the sum of §2,820.42, as the amount due to the plaintiffs from the intestate, on the 28th of April, 1855, was properly taken for that sum, and judgment being rendered upon the verdict, that sum must be certified to the judge of'probate as the amount of the plaintiffs’ claim, to be allowed on the list of claims against the estate, with interest, to be computed thereon from that day.